fraud were common • National Bank Act 1963 • federal charters for banks • Comptroller of the Currency • federal banknotes • tax on state banknotes • state banks survived by accepting deposits -.dual banking system
.A Brief History
DUAL BANKING SYSTEM • Banking at state level until Civil War • state charters. regulation • banknotes as local currency • failures.

There is a moral hazard problem/adverse selection problem between both the bank and its depositors as well as between the bank and its potential loan customers
Depositors
Bank
Loans
This problem must be dealt with through regulation
A bank can deal with this problem with:
•Credit Scoring
•Collateral •Optimal Debt Contracts
.

All Depository Institutions in the US are chartered
Depository Institutions
Commercial Banks
Savings & Loans
Savings Banks
Credit Unions
National Banks Comptroller of the Currency State Banks State Authority
Federal Associations Office of Thrift Supervision State Associations State Authority
Federal Unions National Credit Union Administration State Unions State Authority
.

• Federal Reserve members provide input to the election of Federal Reserve Board Members • The Federal Reserve provides check clearing services
.Federal Reserve Membership (1913)
• National Banks are Required to be members
of the Federal Reserve System (Membership is optional for state banks)
• Federal Reserve members are required to purchase
stock in the federal reserve system.

National Banks 2001
Of the 7.769 banks in 2003. a vast majority are nonmember state banks
State Banks (Non-Member) 4833
State Banks (Non-Member) 935
.

.Federal Deposit Insurance (1934)
• Federal reserve members are required to purchase
deposit insurance.000 are insured by the FDIC. Insurance is optional for state banks (98% of all banks have deposit insurance)
• FDIC insured banks are charged up to 27 cents per $100 of eligible
deposits • All deposits up to $100.

Source:.Federal Financial Institutions Examination Council
.Commercial Banks in the US
Shaded areas indicate US recessions.

Until the mid 1900’s.000
68.000
National Banks Prohibited from interstate branching Must comply with state branching rules
State Banks Unit Banking Limited Branching
Main Office
Statewide Branching
Branch Offices
. US was a nation of unit banks
Year
Number of Banks Total Branches
1900
2000
12.500
7800
McFadden Act (1927)
13.

A good thing?
• Economies of scale
• Diversification
• But • risks with expansion? • responsive to small customers?
.

the activities of commercial banks were severely restricted
The Glass-Steagall Act of 1934 was designed to put a wall between commercial banking and investment banking
Glass-Steagall (1934) Commercial Banks are restricted from participating in equities markets
Interest rates on non.25%
No interest allowed on transaction deposits
Regulation Q
.transaction deposits is restricted to be below 5.Following the great depression.

Branching Restrictions could be avoided by forming holding companies
Main Office
Holding Company
Branch Offices
Subsidiaries
Illegal under the McFadden Act
Legal under the McFadden Act
.

Bank Offices
Financial Services
Makes loans.The Bank Holding Company act allowed holding companies with only one bank to provide limited non-bank financial services on an interstate basis. but doesn’t make loans
Non. This created a loophole around Glass-Steagall!! Prior to Bank Holding Company Act After Bank Holding Company Act
Holding Company
Holding Company
Bank
Bank
Bank
Non-Bank Branches
Collects deposits. but doesn’t collect deposits
.

The Monetary Control Act (1980) Began the phase out of interest rate ceilings at depository institutions Imposed uniform reserve requirements on Banks and Thrifts Riegle-Neal Interstate Banking and Branching Efficiency Act (1994) Allowed holding companies to acquire banks in any state Allowed banks to branch across state lines Financial Services Modernization Act (Graham Leach-Bliley) (1996) Permitted financial holding companies offering banking. securities and other services under one controlling corporation (allowed Citicorp to buy Traveler’s Insurance)
.Deregulation of the Financial Services sector began in the 1980’s. insurance.

Barings Bank went bankrupt due to losses in the Derivatives market. At the time. However.Problems with Monitoring
The CAMELS System Capital Adequacy Asset Quality Management Earnings Liquidity Sensitivity to Interest Rate Risk Banks are monitored using the camels system. it was holding $60B worth of derivative contracts – a staggering number when compared to Baring’s reported equity of $615M!!
. It’s not always easy to accurately assess the risk a bank is taking on
Off Balance Sheet Activities Derivatives
Financial Guarantees (SLC)
Asset Securitization
In 1995.

Problems with Restricting Activities
Banks compete with other financial services companies as well as other banks!! During the late 1970’s. mortgage and small business lending was seriously curtailed!
. but banks were restricted by regulation Q to pay only 5.25% in savings accounts and 0% on checking accounts
Banks Checking Accounts (0%)
Financial Companies Money Markey Mutual Funds (10%)
As households pulled their money out of banks. market interest rates rose well above 10%.

they are forced to operate at an inefficiently small scale!
By forcing banks to remain in a confined geographical location. but small marginal costs).e. they can use this to increase profits at the customers expense!
Banking is a decreasing cost industry (i. you are forcing them to take on idiosyncratic (area specific) risk!
. large startup costs.Problems with Restricting Competition (Branching)
Restricting entry gives banks limited monopoly power. By forcing banks to remain small and local.

.
• other financial institutions take a part of the lending process
-.The implications.service the loan -.originate the loan -.issue and sell security • finance companies that just specialize in originating loans
.

but may not do business in the US.
International Banking Facilities: Accepts time deposits and makes loans to foreign households & firms. but is limited to international trade transactions Branches: Offer a full line of banking services. but are subject to foreign laws
. Can deal with both US and foreign citizens . Edge Act Corporations: Makes loans/accepts deposits.US Banks locate facilities abroad to aid in international trade as well as to avoid regulation and taxes
US Banks Operating Abroad Subsidiaries: Governed by Federal Reserve Regulation K – must be involved in business “closely related to banking. Exempt from reserve requirements.

Subject to all US regulations.Likewise for Foreign Banks…
Foreign Banks Operating in the US Agency Office: Can’t accept deposits from US citizens. Subsidiaries may also set up edge act corporations and international lending facilities
. but can transfer funds from abroad and make loans in the US
Branches: Offers a full range of banking services for US citizens
Subsidiaries: Treated as a US bank.

United States
United Kingdom
Federal Reserve
Bank of England
Under whose jurisdiction do international banks fall? (it’s a gray area)
.

Regulating International Banking
International Banking Act (1978)
Brought foreign banks operating in the US under federal regulation for the first time
Foreign banks. were not monitored as closely as US banks Foreign Bank Supervision Act (1991) Passed shortly after the BCCI scandal Gave the Federal Reserve and the Comptroller of the Currency greater control over foreign banks operating in the US
. however.

Bank For International Settlements (1930)
• Established to handle German WWI reparations. the BIS
has become a center for international cooperation.
• Played a central role in the Bretton Woods Exchange Rate System • Integral in the Establishment of the Euro
• The BIS is like a central bank for central banks.
.

•Largest bank holding company in the United States by
assets. Bank of America is the fifth-largest company in
the United States by total revenue.
•The bank's 2008 acquisition of Merrill Lynch made Bank of
America the world's largest wealth management corporation and a major player in the investment banking market.
. North Carolina.INTRODUCTION
•American multinational banking and financial
services corporation headquartered in Charlotte. as well as the thirdlargest non-oil company in the U.S.
•As of 2010.

S.
• It has a retail banking footprint that covers approximately
80 percent of the U.• One of the Big Four banks in the United States. JPMorgan Chase and Wells Fargo—its main competitors.600 banking centers and 16.S. population and serves approximately 57 million consumer and small business relationships at 5.200 ATMs.
. along
with Citigroup.
the District of Columbia and more than 40 other countries.
• Bank of America operates in all 50 states of the U..

He renamed the Bank of Italy on November 3. the latter established in 1918. when Amadeo Giannini founded the Bank of Italy in San Francisco in an effort to cater to immigrants denied service by other banks. calling it Bank of America.
• On March 7.
• In 1922. Giannini merged with Bank of America.
. A. Giannini established Bank of America and Italy in Italy
by buying Banca dell'Italia Meridionale. Giannini consolidated his Bank of Italy (101
branches) with the newly formed Liberty Bank of America (175 branches). Los
Angeles. 1930. 1927. P.
• In 1928.HISTORY
Bank of Italy • The history of Bank of America dates back to 1904.

Growth in California
• Federal banking regulators prohibited Bank of America's
interstate banking activity.
• In 1958.
. and Bank of America's domestic banks outside California were forced into a separate company. the bank introduced the BankAmericard.
• It was not until the 1980s with a change in federal banking
legislation and regulation that Bank of America was again able to expand its domestic consumer banking activity outside California. which
changed its name to Visa in 1975.
• A consortium of other California banks introduced Master
Charge (now MasterCard) to compete with BankAmericard.

• In 1992. Later that year. Washington.
• In 1994. of Chicago. BankAmerica expanded into Nevada by acquiring Valley Bank of Nevada.
• BankAmerica experienced huge losses in 1986 and 1987 by the
placement of a series of bad loans in the Third World. as
well as its wholly owned banking subsidiary. Robertson Stephens was integrated into BancAmerica Securities and the combined subsidiary was renamed BancAmerica Robertson Stephens
.Expansion outside California
• In 1983. Security Pacific Corporation and
its subsidiary Security Pacific National Bank in California. a San
Francisco-based investment bank specializing in high technology for $540 million. particularly in Latin America. acquired Seafirst Corporation of Seattle. BankAmerica acquired the Continental Illinois National Bank
and Trust Co. acquired its California rival.
• In 1997. Seattle-First National Bank. BankAmerica acquired Robertson Stephens.

• BankAmerica was acquired by Nations Bank of Charlotte
in October 1998.4 billion in order to run various businesses for the bank.
• The merged bank took the name Bank of America
Corporation.. $1.Merger of NationsBank and BankAmerica
• In 1997.
• the integration of BancAmerica Robertson Stephens and
NationsBanc Montgomery Securities. Shaw & Co. a
large hedge fund. was renamed Banc of America Securities in 1998. E. BankAmerica lent D.
.

Bank of America and Banco Itaú entered into an
acquisition agreement through which Itaú agreed to acquire BankBoston's operations in Brazil and was granted an exclusive right to purchase Bank of America's operations in Chile and Uruguay. 2005. Bank of America announced it would
purchase credit card giant MBNA for $35 billion in cash and stock. Bank of America announced it would purchase
Boston-based bank FleetBoston Financial for $47 billion in cash and stock.
• In May 2006.
• On November 20.3 billion. 2006.KEY HAPPENINGS
• In 2004.
• On June 30. Bank of America announced the
purchase of The United States Trust Company for $3.
.

surpassing JPMorgan Chase. With this purchase.
• Bank of America became the largest bank in the Chicago
market with 197 offices and 14% of the deposit share.7 trillion in assets. Bank of America possessed 1. 2007.500 ATMs.
• LaSalle Bank and LaSalle Bank Midwest branches adopted the
Bank of America name on May 5.• On September 14.
• The deal increased Bank of America's presence
in Illinois. Bank of America won approval from
the Federal Reserve to acquire LaSalle Bank Corporation from Netherlands's ABN AMRO for $21 billion. and 1.4 million retail customers. 17.
. 2008.000 commercial bank clients. and Indiana by 411 branches. Michigan. 1.

2007.25% per annum and provided the option to purchase common stock at a price of $18 per share.
• This purchase of preferred stock was arranged to provide a
return on investment of 7.
• On January 11. controlling 20– 25% of the home loan market.1 billion.Acquisition of Countrywide Financial
• On August 23.
. the company announced a $2 billion
repurchase agreement for Countrywide Financial.
• This purchase made Bank of America Corporation the leading
mortgage originator and servicer in the U. 2008.
• Countrywide Financial has changed its name to Bank of
America Home Loans. Bank of America announced they would
buy Countrywide Financial for $4.S..

• At the same time Bank of America was reportedly also in talks
to purchase Lehman Brothers.Acquisition of Merrill Lynch
• On September 14. was then $45 billion. including Merrill
Lynch. and down $108 billion from the merger announcement. Inc. the third largest underwriter of global equity and the ninth largest adviser on global mergers and acquisitions. less than the $50 billion it offered for Merrill just four months earlier.
. in an all-stock deal worth approximately $50 billion. 2008.
• The market capitalization of Bank of America.. Bank of America announced its
intentions to purchase Merrill Lynch & Co.
• The acquisition made Bank of America the number
one underwriter of global high-yield debt.

2009. 2009. using $26. along with a guarantee of $118 billion in potential losses at the company. government through the Troubled Asset Relief Program (TARP) on January 16.Federal Troubled Asset Relief Program (TARP)
• Bank of America received $20 billion in the federal bailout from
the U.
• On December 2.S.6 billion to be gained in "common equivalent securities"
.
• The additional payment was part of a deal with the U. Bank of America announced it would
repay the entire $45 billion it received in TARP and exit the program.
government to preserve Bank of America's merger with the troubled investment firm Merrill Lynch.S.2 billion of excess liquidity along with $18.

• Bank of America will cut around 16. Bank of America began conducting personnel
reductions of an estimated 36.
• This will put a plan one year ahead of a time to eliminate
30.Downsizing (2011 to 2014)
• During 2011. contributing to intended savings of $5 billion per year by 2014.000 people.000 jobs under a cost-cutting program called Project New BAC.
.000 jobs in a quicker
fashion by the end of 2012 as revenue continues to decline because of new regulations and a slow economy.

800 retail branches and over 18.
• Competes with the retail banking arms of America's three other
megabanks: Citigroup. Consumer • The Consumer Banking organization includes over 5.
• member of the Global ATM Alliance
. JPMorgan Chase.S. and Wells Fargo.000 ATMs across the United States.Operations
• Bank of America generates 90% of its revenues in its domestic
market and continues to buy businesses in the U.

• Its strongest groups include Leveraged Finance.S. It is among the 10 largest U. and 79% of
the Global Fortune 500. as well as sales & trading in fixed income and equities markets.S.
.Corporate
• The bank's investment banking activities operate under the Merrill Lynch
subsidiary and provides mergers and acquisitions advisory. capital markets. investment
banking business
• looking to become one of the top five investment banks worldwide. wealth managers.
Investment management
• Global Wealth and Investment Management manages assets of institutions
and individuals. underwriting.
• Bank of America has recently spent $675 million building its U.S.
and mortgage-backed securities. • Its clients include 98% of the Fortune 500 companies in the U. Syndicated Loans.

In 2006. Bank of America sold BankBoston's operations to Brazilian bank Banco Itaú.
• Bank of America currently has offices in Hong Kong. including Brazil.
• Bank of America's Global Corporate and Investment Banking spans
the Globe with divisions in United States. Europe. Shanghai.
. Bank of America acquired a 9% stake in China Construction
Bank. Bank of America was awarded Project Finance Deal of the
Year at the 2008 ALB Hong Kong Law Awards. in exchange for Itaú shares.International operations
• In 2005.
• Bank of America operated under the name BankBoston in many other
Latin American countries.
and Guangzhou and was looking to greatly expand its Chinese business as a result of this deal. one of the Big Four banks in China. and Asia. for $3 billion.
• In 2008. Bank of America announced plans to divest most
of its stake in the China Construction Bank.
• In November 2011.